Published 4:00 am, Tuesday, June 5, 2007

Photo: Paul Sakuma

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A Palm Treo 700 phone on display at a Verizon store in Salinas, Calif., Monday, June 4, 2007. Smartphone maker Palm Inc. will sell a 25 percent stake to private equity firm Elevation Partners for $325 million and name the former technical guru behind the iPod to be chairman, the company said Monday. The deal with the long-term investor brings significant new leadership to Palm, which has been battling stiffening competition in a market that is only going to get tougher with Apple Inc.'s June 29 debut of the iPhone. (AP Photo/Paul Sakuma) less

A Palm Treo 700 phone on display at a Verizon store in Salinas, Calif., Monday, June 4, 2007. Smartphone maker Palm Inc. will sell a 25 percent stake to private equity firm Elevation Partners for $325 million ... more

Palm Inc., maker of the Treo smart phone, said Monday that it will receive a $325 million investment from private-equity firm Elevation Partners and get new leadership, helping it compete in the fast-expanding market it helped pioneer.

Elevation Partners, a relatively new equity firm that counts rock star Bono as a partner, will secure a 25 percent stake in the Sunnyvale company. Palm is using the cash injection, combined with $400 million of new debt, to finance a $9 per share dividend to stockholders. The distribution will total about $940 million and Palm will have $300 million in cash on hand after the transaction.

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The deal also means a shakeup on Palm's board. Jon Rubinstein, former Apple senior vice president of hardware engineering, will join the board as its executive chairman. Rubinstein, who will lead product development at Palm, was the head of Apple's iPod division and was a leader on the development of the iMac.

Ed Colligan will remain as Palm's chief executive, in charge of day-to-day operations.

Elevation Partners founders Roger McNamee and Fred Anderson, former chief financial officer at Apple, will also take seats on the board, replacing Eric Benhamou and Scott Mercer. All the moves are pending shareholder approval of the transaction.

Palm's stock jumped 9.2 percent or $1.48 per share to close at $17.57 per share Monday.

The infusion of cash and management comes at a critical time for Palm, which helped pioneer the handheld computer and smart-phone markets. The competition in smart phones has become increasingly pitched in the last couple of years, with such heavyweights as Nokia, Research In Motion, Motorola and Samsung flooding the field. Apple is the latest rival, with its iPhone set to premiere June 29.

The pressure is now on Palm to create a slimmer, more elegant and consumer-friendly line of devices that can marry its top-notch software with a catchy design.

Colligan said Palm was approached by several larger rivals interested in buying the company earlier this year. But the company was looking more for a partner such as Elevation that could help secure Palm's long-term future, Colligan said.

"As a result of the transaction ... we will have reinvigorated and expanded our leadership team, strengthened our ability to attract new, creative talent, and put in place the right capital structure to support our growth," Colligan said in an analyst conference call Monday. "I am confident this is the right combination of factors to drive long-term shareholder value."

McNamee said Elevation Partners decided to invest in Palm, its largest investment ever, because of its track record of innovation and its place in the fast-growing business of delivering communication and entertainment to mobile users.

"We believe that mobility is the most profound investment trend in the technology world," McNamee said. "Consumers are able to now control their information and entertainment choices. They're insisting on getting their content when they want it where they want it. That's good in a wired world but you can't deliver it on mobile devices. That's why we think this is an unstoppable situation."

Under the terms of the deal, Elevation will pay $8.50 per share of a new series of convertible preferred stock. That represents a 16 percent premium over the stock price during the last 10 days. In addition to the $400 million in new debt, Palm has also drawn $40 million in revolving credit.

Palm's new capital structure makes it less likely the company could be taken over, said Tavis McCourt, an analyst with Morgan Keegan & Co. in a research note.

Analysts said the added expertise, particularly from Rubinstein, will help Palm. But some cautioned against expecting dramatic changes in the near term.

"With Rubinstein leading product development, we expect more disciplined execution and a more market-oriented approach to development," McCourt said. "However, with 18-month production cycles, we do not expect to see the impact of Rubinstein on Palm's new products until late 2008 at the earliest."